What is the 'Business Cycle'

The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a
useful tool for analyzing the economy. It can also help you make better financial decisions.

Expansion is between the trough and the peak.

That's when the economy is growing. Gross domestic product, which measures economic output,
is increasing. The GDP growth rate is in the healthy 2-3 percent range. Unemployment reaches its natural
rate of 4.5 to 5.0 percent. Inflation is near its 2 percent target. The stock market is in a bull market. A well-
managed economy can remain in the expansion phase for years. That's called a Goldilocks economy.The
expansion phase nears its end when the economy overheats. That's when the GDP growth rate is greater
than 3 percent. Inflation is greater than 2 percent and may reach the double digits. Investors are in a state of
"irrational exuberance." That's when they create asset bubbles.

The peak is the second phase. It is the month when the expansion transitions into the contraction phase.

The third phase is contraction. It starts at the peak and ends at the trough. Economic growth
weakens. GDP growth falls below 2 percent.When it turns negative, that is what economists call a recession.
Mass layoffs make headline news. The unemployment rate begins to rise. It doesnt happen until toward
the end of the contraction phase because it's a lagging indicator. Businesses wait to hire new workers until
they are sure the recession is over.Stocks enter a bear market as investors sell.

The trough is the fourth phase. That's the month when the economy transitions from the contraction phase
to the expansion phase. It's when the economy hits bottom. (Source: "The National Business Cycle Dating
Procedure: Frequently Asked Questions," National Bureau of Economic Research.)The business cycle's
four phases can be so severe that theyre also called the boom and bust cycle.

Govt budget balance back in deficit in first-semester

The national governments budget balance swung back to a deficit in the first semester of the year, with
public spending expanding by double digits from a year ago, data from the Bureau of the Treasury
(Btr)showed.

Based on the BTrs report submitted to the Department of Finance (DOF), the national government
incurred a budget deficit of P120.3 billion in January to June this year, a reversal from the P13.7 billion
surplus in the same period last year.

At end-June 2016, the countrys public spending, a closely watched driver of economic growth as it
contributes about a tenth to gross domestic product (GDP), reached P1.22 trillion, higher by 14 percent
from P1.07 trillion last year.

Government revenues, on the other hand, totalled P1.1 trillion in six-months to June, up by only one
percent from last years P1.08 trillion. Netting out the one-time remittance of the Coco levy proceeds in
May 2015 boosts year-on-year revenue growth to 7% or P75.3 billion for the first half of the year.
Collections of the Bureau of Internal Revenue (BIR), the governments main tax agency, totalled P783.4
billion, 11 percent more than the past years P705.9 billion.

The Bureau of Customs (BOC) added P190.6 billion to governments first-semester revenues, an increase
of seven percent year-on-year from P178.6 billion, while the Treasurys income fell five percent to P63.7
billion.

Interest payments, which took up nearly 13 percent of total spending, amounted to P153.7 billion, down
two percent from last years P156.1 billion.

Netting out interest payments, the government ended the first-semester with a P33.4 billion primary surplus,
lower than P169.9-billion primary surfeit in 2015s January to June period.

The assessment of fiscal performance against the governments updated budget target for the first half is not
available since the previous cabinet -level Development Budget Coordination Committee (DBCC) was not
able to sign-off on the 2016 quarterly fiscal program. The updated budget target is expected to be finalized
by the DBCC in its next meeting.

To redress persistent underspending despite healthy revenue growth seen in the previous administration,
the new economic managers under the Duterte administration vowed to accelerate public spending by fast-
tracking infrastructure development necessary to sustain the rapid modernization of the Philippine
economy. Under the new administration, government infrastructure spending is targeted to be equivalent to
six percent of GDP, exceeding the previous administrations five percent goal.

Meanwhile, the budget deficit amounted to P45.2 billion in June alone, down by 38 percent from P72.7
billion a year ago but higher than P17.7 billion in May this year.

Broken down, government revenues rose seven percent to P175.6 billion from P163.6 billion in the
previous year, while disbursements amounted to P220.8 billion, lower by seven percent compared with
P236.2 billion a year ago.

Government revenues in June were lower by 12 percent from P199.8 billion in the previous month, while
expenditures grew by 1.5 percent compared with P217.4 billion in May 2016.

In May 2016, government revenues dropped 18 percent year-on-year from P242.5 billion.

The BIR collected P151.6 billion and P124 billion worth of taxes in May and June, respectively.

The BOCs total revenue collection in May and June amounted to P32.1 billion and P35.3 billion,
respectively.

The national government also plans to ramp up infrastructure spending outside Metro Manila to create
more jobs and ensure growth is felt in the other regions and rural areas.

The DBCC earlier revised the medium-term fiscal program enlarging the deficit ceiling to 3 percent of
GDP to allow more public investments in badly needed infrastructure and support social services. The
DBCC also revised the 2016 deficit ceiling to 2.7 percent of GDP from the original 2 percent program
following the first half performance of revenue and expenditure.

The Cabinet-level committee also cut the 2016 economic growth target to 6 to 7 percent from the earlier
goal of 6.8 percent to 7.8 percent.

The economic managers much lower goal for this year was due to tapering effect of election spending, slow
agricultural output due to El Nio, lower infrastructure due to seasonality and weak external trade.

INTERNAL FACTORS : Internal factors are those factors which exist within the premises of an
organization and directly affects the different operations carried out in a business. These internal factors are
:

A. VALUE SYSTEM : It implies the culture and norms of the business. In other words, it means the
regulatory framework of a business and every member of the organization has to act within the limits of this
framework.

B. MISSIONS AND OBJECTIVES : Different priorities, policies and philosophies of a business is guided
by the mission and objectives of a business.

C. FINANCIAL FACTORS : Financial factors like financial policies, financial position and capital
structure also affects a business performance and its strategies.

D. INTERNAL RELATIONSHIP : Factors like the amount of support the top management enjoys from
its shareholders, employees and the board of directors also affects the smooth functioning of a business.

The EXTERNAL FACTORS include all those factors which exists outside the firm and are often regarded
as uncontrollable.. These external forces can further be categorized as MICRO
ENVIRONMENT and MACRO ENVIRONMENT.

MICRO ENVIRONMENT includes the following factors.

1.SUPPLIERS : Suppliers are those people who are responsible for supplying necessary inputs to the
organization and ensure the smooth flow of production.

2.COMPETITORS : Competitors can be called the close rivals and in order to survive the competition one
has to keep a close look in the market and formulate its policies and strategies as such to face the
competition.3.MARKETING INTERMEDIARIES : Marketing intermediaries aid the company in
promoting, selling and distribution of the goods and services to its final users. Therefore, marketing
intermediaries are vital link between the business and the consumers.

MACRO ENVIRONMENT includes the following factors.

1.ECONOMIC FACTORS : Economic factors includes economic conditions and economic policies that
together constitutes the economic environment. These includes growth rate, infation, restrictive trade
practices etc. Which have a considerable immpact on the business.

2.SOCIAL FACTORS : Social factors includes the society as a whole alongside its preferences and
priorities like the buying and consumption pattern, beliefs of people their purchasing power, educational
background etc.
3.POLITICAL FACTORS : The political factors are related to the management of public affairsAnd their
impact on the business. It is important to have a political stability to maintain stability in the trade.

4.TECHNOLOGICAL FACTORS : Latest technologies helps in improving the marketablity of the

product plus makes it more consumer friendly. Therefore, it is important for a business to keep a pace
withv the changing technologies in order to survive in the long run.

Procyclical and countercyclical are terms used to describe how an economic quantity is related to economic
fluctuations. Their meanings may vary with regard to business cycle theory and economic policy making.
The terms are often used loosely to describe a government's approach to spending and taxation. A
'procyclical fiscal policy' can be summarised simply as governments choosing to increase public spending
and reduce taxes during an economic boom, but reduce spending and increase taxes during a recession. A
'countercyclical' fiscal policy refers to the opposite approach: reducing spending and raising taxes during a
boom period, and increasing spending/cutting taxes during a recession

Budgetary policy refers to government attempts to run a budget in equilibrium or in surplus. The aim is to
reduce the public debt.
It is not the same as a fiscal policy, which deals with the fiscal stimulus to the economy, the repartition of
taxes and the generosity of allowances.

A budget process refers to the process by which governments create and approve a budget, which is as
follows:

The Financial Service Department prepares worksheets to assist the department head in preparation of
department budget estimates
The Administrator calls a meeting of managers and they present and discuss plans for the following
years projected level of activity.
The managers can work with the Financial Services, or work alone to prepare an estimate for the
departments coming year.
The completed budgets are presented by the managers to their Executive Officers for review and
approval.
Justification of the budget request may be required in writing. In most cases, the manager talks with
their administrative officers about budget requirements. Adjustments to the budget submission may be
required as a result of this phase in the process.
A budget deficit occurs when an individual, business or government budgets more spending than
there is revenue available to pay for the spending, over a specific period of time. Debt is the
aggregate value of deficits accumulated over time. We will be focusing on government deficits in
this lesson.

Causes of Budget Deficit

The causes of a budget deficit are both simple and complex. At its most rudimentary level of
analysis, a budget deficit is caused when a government spends more than it collects in taxes.
Reducing tax rates may also cause a deficit, if spending isn't reduced to account for the decrease in
revenue. However, the world is more complex, and a bit more than a mere rudimentary analysis is
required.
 Periods of economic growth and economic decline can have a tremendous effect on the ability of a
government to finance its spending. In fact, a budget deficit can occur even if a government doesn't
increase its spending one cent or lower its tax rate one percent.
Fiscal Consolidation refers to the steps taken by any Govt. to check the rising Fiscal Deficit.

For those who don't know what Fiscal Deficit is, read on:

Fiscal Deficit = Budgetary Deficit + Market Borrowings + other liabilities

Every year when the Budget is presented before the Parliament, it consists of two main things: Income (or
Revenue) of Govt. & Expenditure of Govt. When this Expenditure of Govt. is more than the Income of
Govt., the budget is called as a 'Deficit Budget'.

This deficit in the budget can be calculated based on various factors, and depending upon the formula used
may be called with different names like Budget deficit, Fiscal deficit, Revenue deficit, etc.. For Fiscal deficit,
we use the formula mentioned above.

This is basically a measure of how much money Govt. need in addition to what it already has to cover the
expenses of this year.

This Fiscal deficit is bad for many reasons (quite obviously, your Govt. borrowing money to cover its
expenses can't be a good thing). Some of the reasons are

Creates Inflation
Implies ineffectiveness of Tax collection machinery - Black Money
Higher rates of interests for Govt. Bonds
Higher amount to be paid as interest on Bonds.
Hence, higher expense next year creating more Fiscal Deficit

In simple terms, if Fiscal Deficit isn't a planned one, it is going to create more Fiscal Deficit, which is bad
for any Economy.

To arrest this, the Govt. takes measures to limit the expenditure and increase the earnings. Some of the
steps that Govt. may take are

Cut down the subsidies

Reforms in Tax Structures
Improve profit generated by Public Sector Enterprises
Recover Black money
Austerity measures (limiting Govt. expenditures by limiting perks & privileges of Ministers, and
other avoidable expenditures)

. Internal debt trap

One of the bad effects of internal debt is the interest paid by the government. Such interest
payments increase public expenditure and may become a cause for fiscal deficit. If internal public
debt is not checked and kept within limits, it may take the country to the worst position called
'InternalDebtTrap'.
 2. More burden on poor and weaker sections
Internal debt provides opportunities for the rich and higher middle class to earn a higher rate of
interest from the state on their lending. At the same time the pobr suffer a lot due to
the tax burden. The government levies taxes to repay interest on public debt. But the tax burden
does not necessarily fall on the rich unless it is progressive in nature. In the case of indirect taxes,
the burden is felt more by the poor than the rich.

3. Increasing interest burden

Public borrowing may become costlier for the government especially when it resorts to public
borrowing by issuing bonds and debentures. Such bonds and debentures carry a high rate of
interest to the extent of 15 percent. The impact of such interest payments may develop manifold
and still worsen in the future if the government stick to the same policy of borrowing in the years to
come.

4. Unjustified transfer
The servicing of internal debt involves transfers of income from the younger to the older
generations and from the active to the inactive enterprises.
The government imposes taxes on enterprises and earnings from productive efforts for the benefit
of the idle, inactive, old and leisurely class of bond holders. Hence work and productive risk taking
efforts are penalised for the benefit of accumulated wealth. This adds to the net real burden of
debts.

5. Indirect real burden

Internal debt involves an additional indirect real burden on the community. This is because the
taxation required for servicing the debts reduces the tax payer's ability to work and save and affects
production adversely. The government may also economise social expenditure thereby, reducing
the economic welfare of the people.
Taxation will reduce the personal efficiency and desire to work. Thus there would be a net loss in
the ability and desire to work. The creditor class will also not have any incentive to work hard due
to the prospect of receiving interest on bonds. This would further cause a loss to production and
increase the indirect burden of debt.
The Burden of External Public Debt

1. External debt trap

The external debt creates direct money burden. This is because; it involves transfer of funds from
the debtor country to foreign citizens. The degree of burden depends upon the interest rate, and
the loan amount. The loans are normally to be paid in foreign currency. Therefore, the funds are
mostly transferred from export earnings or by raising more funds from foreign markets.
2. Direct real burden
 The external debt may also result in direct real, burden. The citizens of the debtor will have to
suffer loss of economic welfare to the extent of repayment of principle amount and interest burden.
The foreign currency earned through exports would have been utilized to import better goods and
technology.

3. Decline in expenditure to public welfare programmes

When the government spends a significant portion of its resources towards the payment of foreign
debt it reduces the government expenditure to that extent which otherwise would have been spent
for public welfare programmes.

4. Decline in the value of nation's currency

The repayment of external debt involves an increase in the demand for the currency of the creditor
country. This will raise the exchange rate of the creditor country's currency, and aggravate the
problem of foreign exchange crisis.
The creditor country may also be adversely affected if it is induced to import more from the debtor
country. This may hinder the growth of their domestic industries and cause unemployment.
5. Burden of unproductive foreign debt
The magnitude of external debt burden depends upon whether the debt is incurred for productive
purposes or for unproductive purposes. If it is incurred for unproductive purposes, it will create a
greater burden and sacrifice on the citizens of the debtor country.

6. Political exploitation
In recent years, it was found that the lending countries who dominate international organisations
like World Bank & international monetary fund use the lending opportunity as an instrument to
exploit the borrowing countries economically & politically.
increase income for present generation but also for the posterity. If it is used for unproductive
purposes or emergencies like war it will shift burden on future generation.
(1) Developmental Planning: Modern Governments have resorted to planned development of the
country and intervene in economic affairs according to the requirements of the economy. Almost
all the Government in the world have abandoned the policy of free trade and non-intervention of
the State in business and industry. The planned economic growth requires huge funds that cannot
be collected through taxation. The Governments, therefore, borrow funds from the public.
(2) Unpopularity of Taxation: Taxation always initiates opposition from the public and therefore. the
Government cannot raise unlimited funds by way of taxation. It chooses the easier way for meeting this
opposition, of raising funds through public debt.

(3) Controlling Inflation: Through public borrowings on a large scale. The Government withdraws a large
amount of money out of circulation that helps contain the inflationary pressure in the economy. The
Governments in developed and developing counties take recourse of public borrowing to reduce the
inflationary pressure in the economy.
(4) Waging Wars: During the wars, Governments have to borrow heavily from the public to meet their war-
expenditure. In fact, it has turned out to be the most important reason for the phenomenal growth in
public debt. It was the Second World War that forced the Governments to borrow funds from public.

(5) Facing Natural Calamities: In facing natural calamities such as floods, earthquakes, famine etc. the
Government raise funds through public debt because the amount of such loan is not substantial and
moreover its nature is not permanent.

(6) Deficit in the budget: While preparing the budget, the Government sometimes leave the deficit in the
budget uncovered. If the Government does not think it proper to meet the deficit by resorting to additional
taxation, it fills up the gap by resorting to public borrowings. It may also adopt the second course of printing
and circulating additional currency equal to the amount of deficit in the budget. But, it is also one way of
public borrowing that may lead to inflation.

(7) Controlling Depression: Public borrowing is also looked upon as an effective measure to check
depression and unemployment situation in the economy. The reason is that if the Government raise
revenue through taxation, it will adversely affect the capacity of the people to work and to save and therefore
investment in industry and trade will be harassed. In such a situation, public borrowing may be the best way
because the people who have capacity to save will contribute towards public debt therefore, it will not affect
the people of low income group. Moreover. the debt so raised will be spent by the Government for
productive and developmental purposes which in turn increase the production and demand of the
commodities. It will thus improve the economy.

(8) Increased Public Expenditure: There is a substantial increase in public expenditure due to the
developmental activities of the Government. These activities have increased the responsibilities or the
Government to a large extent. Due to the increased public expenditure unparalleled to taxation revenue has
contributed to the increase in size-of public debt.